Will Istithmar’s exit see Ross’s SpiceJet pie rise?

On Friday, when the news of exit of one of the major stakeholders of budget airline SpiceJet Ltd — Dubai World’s private equity arm Istithmar — broke out, it intrigued almost everyone.    

They were all asking the same question. Why did the West Asian investor divest its equity holding at a time when SpiceJet’s financials were on the upswing?

The no-frill airline reported a profit of Rs 108.94 crore in the December quarter this year against a loss of Rs17.96 crore during the same period last year. Also, the airline industry is headed for good times with demand rising and airfares firming up.

There are different theories for Istithmar’s move floating in the
market. The obvious one is that the investment arm of the troubled Dubai World, which is saddled with huge debts, was in desperate need of money and had no other option but to offload its 13.4% in the Indian carrier.

“I think, they (Istithmar) have internal problems and the price (of SpiceJet scrip) was attractive,” said a senior finance official of SpiceJet, who did not want to be named.

But more interesting is the reading of an analyst, who did not want to be named. According to him, Istithmar’s departure from SpiceJet board could be strategic one. It could have been done to pave the way for turnaround investor Wilbur Ross to increase his stake in the company.

Ross faces the hurdle of foreign direct investment (FDI), which is capped at 49% in domestic carriers. Since FDI in the New Delhi-based low-cost airline is already touching the ceiling, there was a need to push out one of the foreign investors to make way for the US investor. Apparently, it had to be the beleaguered Istithmar.   

“Known as a vulture capitalist, Ross is known to pressurise other foreign investors (to move out) just so that he can hold a controlling stake,” said the analyst. Ross currently has a representative on the board.

Interestingly, Ross holds $80 million foreign currency convertible bonds that can be converted to equity by December 2010. If he opts for conversion, he can increase stake by 32%.

Then, there are some, who believe it is promoters - London-based Bhupendra Kansagra and his family - who are eyeing a controlling stake in the company.

“Istithmar has sold it to mutual funds. Who knows whose money is it? With improving scenario, promoters are looking to increase their stake,” said an industry insider, who did not want to be named.

 With inputs from Ramiya Bhas